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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: smolejv@gmx.net who wrote (14096)	1/28/2002 11:21:46 AM
From: Ilaine	Read Replies (3) \| Respond to of 74559

DJ - as I pointed out previously, the Fed doesn't target money supply growth any more. At the present, the way they attempt to implement Fed policy is vis-a-vis the interest rates. However, the Fed does affect the size of the money supply via open market operations, buying and selling government securities, which increases or decreases the reserves at Federal Reserve banks. However, reserve requirements do not apply to the components of M2 and M3 absent M1. Reserve requirements only apply to so-called demand deposits, aka checking accounts. As you can see by the attached data, the Fed significantly increased reserves as a response to 9/11, as well as just before Y2K. stls.frb.org But in general, the Fed only changes reserves to achieve the target Fed funds rate. You should be aware that M3 consists of M2 plus time deposits of $100,000 or more, term repurchase agreements of $100,000 or more, certain term Eurodollars, and balances in money market mutual funds restricted to institutional investors. In other words, big chunks of semi-illiquid money that is just sitting there. Yes, it's becoming a very large number. But what does that tell us? Go back and click the button that makes an overlay for percentage change from year to year. My guess is that if you overlay that with the total market cap of the stock market you'd have an inverse ratio over the past five or so years. In other words, I am guessing that large institutions are shifting their preferences from holding their surplus cash reserves from the stock market to CDs and money market mutual funds. I don't have the skill set to test that hypothesis, but I am trying to learn how. Which is more than I can say about the silly people who say, "oooo, oooo, it's a Big Number." Here is a recent paper on endogenous money supply and business cycles. I think you'll be surprised by its conclusions. clev.frb.org